A reaffirmation agreement is a contract between you and a creditor (generally a secured creditor) in which you agree to pay all or a portion of the money owed, despite the bankruptcy filing. In return for your agreement to pay after the bankruptcy, the creditor promises that, as long as payments are made, the creditor will not repossess or take back the property.

You’ve got three choices: Redeem, Reaffirm, or Surrender

Redemption means that you agree to pay the secured creditor the present value of the asset that is the collateral for the debt usually in a single cash payment. Once you have made the payment, the asset is yours, free of the secured debt. The balance of the debt is treated as an unsecured debt in the bankruptcy and discharged with your other debts.

Reaffirmation is an agreement to waive the discharge as to the reaffirmed debt and to pay the debt according to the terms of the original agreement or some modified version of the original agreement. The reaffirmed debt is legally enforceable if you stop paying later on, and the creditor retains the security interest in the asset until the debt is paid.

Surrendering the collateral means that you give the creditor the property that it holds a lien on. This renders the debt an unsecured debt in the bankruptcy. The creditor can sell the asset to recover part of the debt and is only entitled to a claim in your bankruptcy proceeding for any amount due that was not recovered. Even if the asset isn’t worth what was owed on it, the unpaid balance is discharged in the bankruptcy.

Among the documents filed in a Chapter 7 case is a statement of intentions (we call it a 521 statement) which advises all parties what the debtor proposes to do with respect to those assets subject to liens. The statement of intentions can be amended to show a different treatment, if the debtor changes his mind.

There is more, an unwritten option.

The other choice of a debtor, not included in the bankruptcy code, is to do nothing with respect to the lien. Prior to the amendments to the Bankruptcy Code enacted in 2005, in some jurisdictions, such as Oregon, if you continue to make the payments on the debt secured by a car and the creditor continues to accept them the creditor cannot repossess the car. The bankruptcy amendments have introduced even more uncertainty: the provision that said that bankruptcy filing alone could not be a contract default was eliminated. Most consumer contracts make the filing of bankruptcy a reason for contract default. State law probably now will have to decide on whether a contract that is current on payments is breached by merely filing bankruptcy. If the asset has a low value relative to the cost of repossessing it (such as used computers, major appliances, automobile tires) the debtor can simply decline to redeem, reaffirm or surrender and wait to see if the creditor will take action to recover the collateral after the bankruptcy. In our experience, creditors often threaten but usually do not pursue this kind of collateral after the bankruptcy even if the debt is not reaffirmed.

Before entering into such a reaffirmation agreement, ask an attorney to ensure that your rights are protected and that any reaffirmation is in your best interest. If you are not represented by an attorney in your bankruptcy case, the reaffirmation agreement will have to be approved by the bankruptcy judge. The judge will ask questions to determine whether the reaffirmation agreement imposes an undue burden on you or anyone you are supporting and whether it is in your best interests. Since reaffirmed debts are not discharged, the bankruptcy court will generally only reaffirm secured debts where the collateral is important to you, for example a car needed to get to work. Reaffirmation agreements are strictly voluntary. They are not required by the Bankruptcy Code or other state or federal law. For this reason, the creditor will often agree to modify the contract by reducing interest rates or even taking less money if you agree to reaffirm. The debtor’s attorney and the bankruptcy judge will not want a debtor to be burdened with a reaffirmation after the discharge in bankruptcy.

Redemption happens when the debtor pays a secured creditor the value of the property securing its debt but does not agree to the contract terms. Redemption is available only to a consumer who owes a consumer debt. Redemption is useful when the value of your property is less than the balance due on the loan secured against it. If this is not the case, and the loan balance is less than the property’s value, other options, such as paying off the debt or entering into a reaffirmation agreement should be considered if it is important to keep the property.

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